Question

Question 2: Cash and accrual accounting (5 marks) You have been provided with the Statement of Profit or Loss and the Cash Flow Statement for Bach Ltd for the year end 30 June 2020: $ 390 000 ....................... Bach Ltd Statement of profit or loss for the year ended 30 June 2020 $ Revenue Service revenues Expenses Salaries expense 110 000 Supplies expense 15 000 Rent expense 45 000 Depreciation expense 22 000 Profit before tax Tax expense Profit 192 000 198 000 40 000 158 000 $ Bach Ltd Statement of cash flow (Extract) for the year ended 30 June 2020 $ Cash flow from operation activities Receipts from customers 350 000 Payments to suppliers (18 000) Payments to employees (100 000) Payments for rent (60 000) Payments for income taxes (20 000) Net cash provided by operating activities $152 000 Required a) Name and explain the accounting method used to prepare the Statement of Profit or Loss. b) Name and explain the accounting method used to prepare the Statement of Cash Flows. c) Identify three differences in the above statements and fully explain the likely cause. (1 mark) (1 mark) (3 marks)

Answer 1

a)

The method of accounting used in preparation of Statement of Profit and Loss is Accrual Accounting or Accrual Basis of Accounting.

In Accrual Accounting , all revenues and expenses are recorded on the basis of their accrual i.e. when they becomes due, whether the cash has been paid or not in case of expenses and whether cash has been received or not in case of revenues.

b)

The method of accounting used in preparation of Statement of Cash Flows is Cash Accounting or Cash Basis of Accounting.

In Cash Accounting , all revenues and expenses are recorded on the basis of the actual payment made, it is not relevant when the expense or revenue becomes due, it is recorded only when there is some cash inflow or outflow.

c)

Three differences in Statement of Cash Flows and Statement of Profit and Loss-

Salaries Expense is shown in Statement of Profit and Loss as 110,0000 while in Statement of Cash Flows as 100,000. This is due to the reason that total salary that got accrued during the period will be 110,000 but out of that cash payment has been made for 100,000 only.

Similarly Rent expense is shown in Statement of Profit and Loss as 45,000 while in Statement of Cash Flows as 60,000. This is due to the reason that some rent has been prepaid that will get accrued during the subsequent period the cash payment in this period has been made for 60,000.

In Statement of Profit and Loss , depreciation is also shown as expense for 22,000 but there is no such expense in Statement of Cash Flows because depreciation is a non cash expense ; hence no cash is paid as a result this is not shown in Statement of Cash Flows.